Should I Build a Bond Ladder?

[ThriftyTexan]

I’m a short-time lurker. I’ve read many of the questions and responses for research. I really respect the insights and information shared on the forums. Everyone seems really down-to-earth and straight foreward.

I’m 45 years old with about 22 years until retirement. I’ve been re-allocating funds to meet my investment goals. For the first time I am investing in individual bonds. I would like to start a bond ladder with $10, 607 in a rollover IRA. Since the money is in an IRA, I’m willing to invest in taxable bonds.

I’m looking for suggestions on how to create a bond ladder. My accounts are at TD Ameritrade and they have a bond ladder tool that I’m going to try out, but haven’t started yet. I’m not considering bond funds because Suze Orman’s advice makes sense to me. She points out that investing in individual bonds gives you a set interest rate, while bond funds do not. Plus you pay management fees for a bond fund. Should I reconsider? Is $10k enough to start a bond ladder? I’ve seen discussions about CD ladders. Would these produce the same results?

Any suggestions and/or information are welcome. Let me know if you need more information to answer my questions.

My current Roth IRA’s and Rollover IRA’s are invested as follows:

28% Lage Caps (27,098.93):
VEU Vanguard FTSE All World ex US 9,216.62
VDIGX Vanguard Specialized Portfolio Diversified Growth 8,915.95
SEQUX Sequoia Fund 8,966.36

29% Mid Caps (28,464.85):
REACX American Century Real Estate Fund 4,138.41
BGRFX Baron Growth Fund 18,763.21
GAAEX Guinness Atkinson Funds Alternative Energy Fund 5,563.23

32% Small Caps (31,710.02):
PENNX Royce Fund Pennsylvania Mutual Fund Invstmt Cl 26,452.25
EUEYX Alpine US Real Estate Equity Fund 5,257.77

11% Bond Ladder Investment Amount (currently in a Money Market Fund): 10,607.00

Total Retirement Investments: 97,881 approx

Thanx in advance for any responses!!!!

[jIM_Ohio]

I agree bond ladders make more sense than bond funds, but not because of what suze orman said.

If you own a bond fund and rates go up, the value of the bond fund went down. Meaning you could buy $1000 of shares in the bond fund, then at some point in future you have less than $1000 in same fund. You should make that up in yield, but technically your net worth went down until the interest is paid.

If you do a ladder you put $1000 in, and you are GUARANTEED to get the $1000 back (unless there is a default), plus the interest.

[swanson719]

The only difference between a bond ladder and a CD ladder is the rate and tax. In both, the rate is set by the current market. With a bond fund, you have more flexibility to change funds based on market performance, as opposed to a CD where you are locked in usually for a fairly significant period of time from an investment standpoint. This makes bond ladders more appealing, but they are also higher maintenance and may have more fees involved if your broker charges set up/trades, etc. $10,600 is a fine amount to start with, just be aware of all the fees you could end up paying. Don't get stuck in TDAmeritrade thinking you have to use them - if they are worth it, go with them, just be open to other companies as well.

[ThriftyTexan]

Thanx JimOhio and Swanson719. Good points from both of you. I'll keep an eye on the fees at TDA. If you think of anything else, please do share.

[jIM_Ohio]

Look at treasury direct.gov if you want to set up a ladder and avoid fees.

[noppenbd]

Treasurydirect is the cheapest way to buy treasury bonds but you will not be able to use your IRA money on treasurydirect.

[jIM_Ohio]

Treasurydirect is the cheapest way to buy treasury bonds but you will not be able to use your IRA money on treasurydirect.

help me out here- why?

I looked into this and could not decide if treasury direct supported IRAs or not and could not come to a definitive solution- on what grounds are you basing this comment on?

[noppenbd]

I was basing it on this article from Fool.com (which is about 2 yrs old, so things may have changed): Buy Treasuries Directly

quote: "Another drawback is that investors cannot use Treasury Direct for IRA accounts."

Another old article:
Tough to buy Series I bonds for IRA

Edit:
A more recent post seems to say you still cannot use treasurydirect for IRA purchases:
TIPS | Getting Personal | Marketplace from American Public Media

[jIM_Ohio]

I was basing it on this article from Fool.com (which is about 2 yrs old, so things may have changed): Buy Treasuries Directly

quote: "Another drawback is that investors cannot use Treasury Direct for IRA accounts."

Another old article:
Tough to buy Series I bonds for IRA

Edit:
A more recent post seems to say you still cannot use treasurydirect for IRA purchases:
TIPS | Getting Personal | Marketplace from American Public Media

thx
liked the 3 link- good question, bad answer- still OK to own bonds in a taxable account if tax is known constraint going in (because if I had to choose between bond fund in IRA or owning the bond taxable, the stability of principal outweigh the tax shelter, IMO.

[noppenbd]

thx
liked the 3 link- good question, bad answer- still OK to own bonds in a taxable account if tax is known constraint going in (because if I had to choose between bond fund in IRA or owning the bond taxable, the stability of principal outweigh the tax shelter, IMO.

May be that his answer is appropriate for TIPS, since their tax treatment is poor in taxable accounts (as the principal is indexed upwards for inflation the gain is taxable immediately, even though you do not actually realize any gains; therefore you would have to pay these taxes out of other funds or the bond interest).